EDITOR'S LETTER: Destruction, creation

PERE Magazine September 2009

Many people blame Wall Street for the real estate catastrophe now upon us. As major participants in the real estate bubble, private equity real estate GPs share some of the blame for helping to inflate assets, over-apply leverage, downplay risks and puff up expectations. But opportunity fund guys are also going to be a big part ofthe cure.

The real estate market is now at an inlflection point between 'destruction' and 'creation.'”

The real estate market is now at an inflection point between “destruction” and “creation”. This issue of PERE profiles 15 firms that we believe will help tip the market further toward value creation. These are firms, suggested to us by veteran market sources, have the skills and capital to pick up the pieces of the market and help put it back together. And make no mistake – they’ll profit handsomely in the process.

As we stress in the introduction to “Thrivers and survivors” (see p. 26), not every GP has the wherewithal to navigate the detritus-filled swamp of a sunken property market. The seller dynamics are completely different; there are often bankruptcy courts involved; there’s little-to-no leverage available; the front door of equity is often locked and one must enter through the back door of distressed debt. Once you actually own these assets, it’s hard work getting back to intrinsic value – it requires something that asset-flippers never had: asset management skill. It’s a return to this industry’s opportunity-fund roots.

Many of the original opportunists of the early 1990s went on to build major asset management franchises that, by the time the mid-2000s came along, were pursuing strategies that were completely different from the RTC days. Let’s face it – the strategy of 2003 was a lot more straightforward than the strategy of 1993.

Now, the strategy of 2009 requires more planning (see our profile of Blackstone’s research initiative), risk-measurement and flexibility. It requires the GP to be opportunistic. We’re sure you’ll have your own views on our 15
Thrivers, but we’re also sure you’ll agree it’s a watch-list worth creating.

Enjoy the issue,

David Snow